In defence of offshore wind

In recent weeks government efforts to scale-up low-carbon energy here in the UK have taken quite a battering in the press, with alarming reports of imminent enormous increases in electricity bills supposedly thanks to the country’s climate change policy. The latest blow comes courtesy of a report by the right-of-centre think tank Policy Exchange (PE), whose report today concludes that households will by 2020 be paying an extra £400 per year thanks to measures to reduce carbon emissions.

The Policy Exchange report (PDF) is important and worth reading, and some of it makes a lot of sense – in particular the conclusion that opportunity costs are real, and that the cheapest measures to reduce carbon emissions are therefore likely to be the ones most worth taking. I have argued myself that spending 600 euros or more per tonne of carbon abatement on solar PV in Germany makes little sense when carbon is trading on the EU ETS for as little as 6 euros per tonne. The Policy Exchange report also contains some useful observations about the need to consider the ETS impact more coherently when planning the UK’s low-carbon investments. PE also sensibly make clear that they are not opposing climate mitigation measures per se, and that making low-carbon energy investments is essential.

However, Policy Exchange’s conclusion that offshore wind is a waste of money, and its implication we should fall back on gas generation instead, does not I believe stand up to scrutiny – and nor does its £400 headline figure for increased cost of energy per household. As usual the devil is in the detail. PE has a note at the bottom of page 5 which gives a figure for the 2020 levelised cost of offshore wind as £190 per MW/h, sourcing this to Mott McDonald but without giving a specific reference. I assume they mean Mott McDonald’s 2011 report ‘Costs of low-carbon technologies’ – yet this gives a 2020 levelised cost estimate for offshore wind of £103-114 per MW/h, much lower than PE claims.

I can only assume that since PE’s figures for the projected costs of offshore wind appear to be flawed, so is its conclusion that the technology is “hugely expensive” and that subsidies to support it are “wasteful”. There may be a convincing explanation for the discrepancy in the figures – if so I would like to hear it. Either way there are other reasons to support offshore wind – most importantly, the issue of scale. Whilst onshore wind will slow considerably because of public acceptability issues, offshore has less obvious problems and can deliver tens, even hundreds, of gigawatts of low-carbon power. The UK is a world-leader in deployment, and this is a position which can be expected to deliver economic benefits in years to come in ways which are currently unquantifiable.

A large proportion of PE’s headline £400 energy costs per household figure also depends on some pretty questionable assumptions. One of them is that fully £185 of this additional cost comes not on actual bills but in the assumed higher cost of goods and services passed on from businesses, who will themselves be paying higher bills thanks to low-carbon premiums on energy prices. However, since PE’s estimates of energy costs seem to be flawed at the outset, presumably this figure is also wrong. The assumption that 80% of higher energy prices is passed directly on from businesses to the consumer is also probably unjustified – and in any case simply adding this to a headline-catching £400 figure that no energy consumer would ever actually see is somewhat misleading to say the least.

PE gives a cost of £300 per tonne of carbon dioxide saved by offshore wind, certainly very ‘expensive’ given the current European price of carbon. However, this is based on the assumption that the competition is gas. If one assumes instead that each additional few gigawatts of wind can allow a coal-fired power station to be taken offline, then the cost per tonne of CO2 might be halved (given that coal produces twice the carbon of gas). It can be reduced still further if indeed PE has got the levelised cost figure underpinning it wrong. In addition, the current low ETS carbon price is because of poor policy and oversupply – assuming prices will remain at rock-bottom out to 2020 and beyond is not credible either.

Calculating a net figure for additional energy costs by 2020 is no easy task, not least because of crucial underpinning assumptions such as that regarding the price of gas over the next decade. Whilst in recent years this has increased, putting up household energy bills by £290 between 2004 and 2010 (according to the Climate Change Committee) the assumption that the price of gas will continue to rise is less credible these days with the explosion of shale gas onto the US market, increasing supply and thereby driving down wholesale prices. This trend is likely to continue, and will presumably add to downward pressure on gas prices in years to come.

I am not qualified to offer my own figure here – but I would refer readers to the Committee on Climate Change’s December 2011 report (PDF), which undertook a similar exercise to Policy Exchange yet came to a rather different conclusion. The CCC concludes that an additional £110 may be added to household energy bills by 2020 thanks to additional costs of low-carbon generation. (In fairness one should point out that PE’s figure is not just bills but additional costs also in taxes and via purchases of goods and services, so there is a slight apples-and-oranges factor here.)

So the upshot is that adding low-carbon generation is not likely to save anyone money on their bills, at least by 2020 and particular if gas prices fall in comparison due to the shale gas revolution. This is admittedly different from the win-win scenario renewables advocates sometimes portray. However, it is clearly essential that the UK develops its domestic renewables resources, and that it delivers on its commitments to the EU and internationally in terms of meeting emissions targets. How to do this most cost-effectively is an entirely legitimate question – but unfortunately today’s Policy Exchange has likely helped muddy the waters rather than clarify this important area of energy policy.

16 Comments

It’s welcome to read measured criticism of our report, in contrast to much of today’s megaphone comment. I wanted to respond to three points you pick up.

The first is the estimate for the levelised costs of offshore wind. The £190/MWh is a current figure for Round 3 – deep water – offshore wind (not average offshore wind). The large majority of planned UK offshore wind is Round 3 – i.e. deep water. The figure is drawn from a 2010 DECC/Mott McDonald report http://www.decc.gov.uk/assets/decc/statistics/projections/71-uk-electricity-generation-costs-update-.pdf, which separated out Round 3. The figures you quote are a few months more recent but relate to average offshore wind and to expected costs in 2020, by which time of course households will be paying the subsidies for earlier more expensive installations. It’s also worth adding that my £400 figure does not at all rely on these offshore wind figures – it works with DECC’s estimates for the costs of renewable subsidies.

The second point is about the opportunity cost of offshore wind. If it was the case that UK coal-fired power generation would stay on the grid if the offshore wind were not built, then I would agree with your point – and we would have been better to have used say a grid average counterfactual. But almost all coal closes anyway, as a result of the Large Combustion Plant Direction, Carbon Price support, etc. So I believe that new gas is a better proxy for calculating the opportunity cost.

The third is the point about how much of businesses’ higher energy costs are passed to households. I refer in the report to five impacts that higher energy costs for a business could have: higher consumer prices, lower employee wages, lower shareholder (much of it pension fund) returns, higher prices to foreign customers and (potentially) offsetting by productive efficiencies. On the basis that these are probably in order of scale and most of the first three ultimately hit households, I consider 80% is a reasonable assumption.

More generally, I would be the first to recognise that making precise estimates for 2020 impacts is incredibly hard, and anyone’s estimates will be wrong. But the overall message from the report is not dependent on the precise figures.

I am grateful for your rapid response, and for your taking the time to engage with this. On some specifics:

– I accept that your levelised cost figure from Mott McDonald was properly sourced and not just made up! (Please in future include full references for the sake of clarity.) I wonder however why you plump for the much higher figure, and focus specifically on only Round 3 when surely the issue is offshore wind in totality – indeed the report talks about ‘offshore wind’ in a generic sense in several places.

– It’s great that we all seem agreed on the desirability/inevitability of closing down all coal. That seems to me to be a central issue.

– Your report does not seem to acknowledge or respond to the CCC’s £110 by 2020 figure for energy bills – do you consider it to be a credible estimate?

– Can you provide a literature basis for your 80% assumption on businesses passing on costs? It sounds like assertion at the moment, and I’m sure there is more backing it up than this.

On your general observation that “making precise estimates for 2020 impacts is incredibly hard, and anyone’s estimates will be wrong”, this is absolutely the point. I couldn’t agree more. That is why I think one should be cautious about producing top-line headline-grabbing conclusions like your £400 one – which will add to pressure in a particular policy direction (against low-carbon deployment) without sufficient justification.

“Unnecessary and hugely expensive renewable energy policies will cost the average household in Britain a total of £400 a year by 2020 – the equivalent to 2.5p on VAT – according to a new report by leading think tank, Policy Exchange. The £400 is not the total cost of climate policy but the additional cost imposed because the Government subsidises expensive renewables such as offshore wind rather than cheaper ways of reducing carbon emissions.”

Do you really think this is justified by the report and its underlying assumptions? I’m afraid I don’t.

We agree on much, including, most importantly, that we want policy action to be effective in reducing carbon emissions.

It’s because of that I definitely am trying to add pressure for climate policy to move in a more cost effective direction. That particularly includes wasting fewer of the available resources on unnecessarily expensive ways to decarbonise (like deploying up to 15GW of Round 3 offshore wind by 2020).

Unnecessarily expensive decarbonisation will not ultimately be sustainable and will not therefore achieve the carbon reductions science says we need; it squanders resources which could be better used to stimulate more valuable low carbon innovations; and it sets a far from compelling example to other countries. I know that you understand this argument.

I believe that making this argument clearly, including by estimating the costs which DECC has so far failed to, is the best way to achieve long-term sustainable climate policy.

Kind regards
Simon

Mark Lynas(Post author)18 January 2012 at 3:37 pm

Dear Simon,

Not only do I understand that argument you are making, I entirely agree with it. Absolutely we must keep costings central to this debate in order to get the best low-carbon bang for our buck. But that is why cost-related reports such as yours must be on the firmest possible ground – and I’m not at all sure this is the case for your latest piece of work unfortunately.

I realise you must be very busy… but could you possibly offer some response on my points above, in particular the following:

1. Do you agree with the CCC estimate of £110 on energy bills by 2020? If not, what is your alternative figure for this alone?

2. Can you offer a clearer justification for your estimate of costs passed on by business to consumers, given that this accounts for nearly half your headline £400 figure?

As Simon acknowledges, all estimates for the cost of green policies in 2020 will be wrong, and as such the row between the government and its critics over the methodologies for calculating cost projections will never end.

What is more interesting is Policy Exchange’s recommendations for an alternative approach based on a simple economy wide carbon price. This is a great idea on paper and would undoubtedly be the best way of ensuring we deliver the most cost effective transition to a low carbon economy. Price the externality and then the market will do the rest.

The problem is that such an approach is politically even less viable than the current complex subsidy model. If you gave the Policy Exchange what it wished for in the form of an environmentally credible carbon price it would have to be extremely high to deliver the scale of emissions cuts required. It would also have to be global to deal with the problem of carbon leakage that would result in the UK unilaterally setting a high carbon price.

A global carbon pricing agreement is decades away at best, which means those calling for a simpler market based approach to curbing emissions are in reality advocating yet more years of inaction.

Subsidies for low carbon technologies are less than perfect, but they are the best available option at a time when even the chief economist of the IEA is warning we are heading for a six degree world.

One should indeed be very cautious about making this sort of claim. A tweet from @Policy_Exchange earlier today promoted the report with the claim that its new report shows £400 added to BILLS [my emphasis]. This is a stretch on a stretch – the report itself, which has significant flaws talks about increases to the cost of televisions and general taxation, which is an entirely distinct thing from ‘bills’.

A report that claims to shed new light on a debate does, as Mark says above, have to be very clear about its assumptions and claims, otherwise it becomes very easy to dismiss, as DECC economists have done.

At the very heart of the briefing are two big problems, which can be found throughout recent PE reports. (1) analysis stops at 2020 and is presented as static MAC analysis – ie costs today. Mott McDonald report says costs will fall over time and that much of the renewables will be built closer to 2020 than today, thus costing far less than their current ‘snapshot’ costs. Indeed this is one of the point of subsidies. (2) significant downplaying of IEA, Deutsche Bank, Wood Mackenzie et al estimates that gas prices are likely to rise. There is no comparison with the counterfactual here; for example, why not present the costs to the householder in terms of business passing on higher gas prices?

Gas prices rise fairly modestly in the latest IEA reference scenario, with the IEA now thinking prices will rise more slowly than previously expected. Its ‘Golden Age of Gas’ scenario has even slower price rises as shale supply increases sharply.

Heroic assumptions in both cases. Will offshore wind move to vertical axis and floating structures? What will be the price of natural gas? Who knows. But the argument that offshore wind is necessarily uncompetitive with other low carbon technologies is certainly not backed by Mott McDonald’s work for the CCC.

I would just add a few words of caution about levelised cost comparisons becoming such a passionate feature of debates. Initially I was quite welcoming of the 2010 Mott Macdonald material as I recall being pleased that there were more realistic numbers being studied by govenrment compared to the craziness of the John Hutton era when coal plants were flavour of the month and apparently cheap as chips.

But I have subsequently been dismayed with how the MM conclusions have been seized on as if they are unassailable facts and as if we should base policy on LC assumptions alone.

Specifically I have not been convinced by the ‘NOAK’ numbers MM has deployed. The FOAK numbers seem more useful as they are closer to EPC prices and then we should debate the potential for learning across the technologies, not just take MM’s word for it. The government’s policy at the moment is to drive the cost of offshore wind to 100/MWh by 2020. One might question the extent to which that is achievable, but I for one am pleased they are trying rather than leaving it to the fantasy that the carbon price will drive such technologies down the learning curve.

Overall I am disappointed by the PEx report. I think PEx has things to say about technologies hitting high deployment before they are truly commercialised. But I am afraid that the PEx report today has clearly backfired because it has adopted a slanted rather than objective view by cherry-picking numbers to make a campaigning case against the RES target and playing it out to fit tabloid narrative.

Really it is much better to do all the maths rather than select out little bits of the puzzle.

The first problem with wind power is that it is highly variable without any correlation with demand. It means you must have backup power available, and that can quickly ramp up. Wind power has also a low marginal price, it is an industry with high fixed costs. So for the backup, the choice will certainly be a source of electricity with high variable costs. And today that means fossil fuels, gas mostly. As the actual power from the entire fleet of wind turbines will vary between 70% of nameplate power and 0%, with an average around 25%, it means fossil plants will run twice more than the wind turbines. So a lot of GHG emissions are probable. If there were reliable means to produce synthetic fuels or store enough energy, it would be a game changer, but we don’t have any such technology now.

As for the price, the french government has been offering a feed-in tariff of €130/MWh for quite some time now, to no avail. It ended up setting up a public tender, saying it would accept prices of €170-200/MWh guaranteed over 20 years, with connection to the grid between 2016 and 2020, in line with the figures given in the PE report. The cost to producers maybe lower, with an overprofit, but retail customers will be charged those €170+/MWh.

Although a well constructed and argued commentary, criticism of wind energy on grounds of efficacy is not discussed. A recent article in the Guardian asked whether wind turbines increase carbon emissions. Tellingly, neither the pro-wind Guardian newspaper, nor representatives of the wind industry were able to provide any data to refute this criticism. One spokesman for the wind industry cited a study (linked below) which on closer examination acknowledged:

“The report contains projections that are based on assumptions that are subject to uncertainties and contingencies. Because of the subjective judgements and inherent uncertainties of projections, and because events frequently do not occur as expected, there can be no assurance that the projections contained herein will be realised and actual results may be different from projected results.”

Studies – albeit non-peer reviewed – of the effects of wind energy on the operation of balancing generation are becoming available. These do lend support to the notion that much of the output of wind infrastructure is negated by the increased consumption of fuel in plant operating to counter the intermittency of wind farms – see link below for an example.

Astonishingly, Leo Hickman, when concluding the Guardian article on the relationship between wind energy and carbon emissions from electricity generation stated: “Until some independent, peer-reviewed research is published on this matter, this question will remain unanswered.”

Thus at best, the deployment of large volumes of wind energy, either onshore or offshore appears to be based on a costly and high-risk assumption – an assumption that is in conflict with emerging analyses. And that is before we have considered the financial consequences of deploying large volumes of wind and nuclear energy in parallel, which the leading wind industry journal “Windpower Monthly acknowledged was “an impossibly expensive mix” !

I have read through the above discussion on the cost and the intermittency of offshore wind electricity.
Just some thoughts.
1 If you have a European wide electricity network then it is very unlikely that the wind does not blow anywhere. You may end up using Spanish wind electricity one day and exporting it to France the next.
2 Gas is not renewable, but does produce less carbon than coal fired generation and can therefore be a useful transition technology. I guess English gas comes from the North Sea. This seems to be running out. The logistics of importing it from the US, Russia or the Middle East will have a cost implication.
3 Domestically produced energy has energy security benefits. And a risk premium needs to be considered in the pricing of energy.
4 It seems that the spot price of electricity in Germany has been reduced by renewables.
5 Germany is gearing up for massive installation of offshore wind electricity installation to counteract the decommissioning of nuclear power. This is likely to reduce the cost, as it did with PVs.
John

“If you have a European wide electricity network then it is very unlikely that the wind does not blow anywhere. You may end up using Spanish wind electricity one day and exporting it to France the next.”

However, think of the implications of that, in terms of the amount of redundancy (a major driver of cost) required on the network. To use you example, if europe as a whole wants to see (say) 50% of it’s power coming consistently from wind, that means that Spain would have to have sufficient capacity to generate that, as would France etc – i.e. the wind capacity has to be sufficient to carry not only local load, but that from elsewhere too.

That really starts to hurt when you think about the impact on wind’s already low capacity factor. If you’ve sufficient over-buld to sustain usage over a significant proportion of Europe from individual countries, then in periods when there’s wind across the continent, there will simply be too much production, and turbines will have to be feathered or otherwise go off-line – absent the development of low-cost technology capable of storing huge volumes of electricity.

Wind capacity factors are already low – in the UK about 26% for onshore wind, lower at 20% or so in Germany. If you start to assume having to forgo production at times of high wind availability, that will drop even further – which directly impacts prices, since there are almost no variable costs involved in wind production. What’s worse, those capacity factors are heavily dependent on output at times of high wind speeds (as production varies with the cube of wind velocity) – i.e. exactly those periods that would arise from large weather systems covering much of Europe.

I’d also have doubts that wind turbines will show similar cost behaviour to that of PV – it’s hard to see, for example, how you’d introduce significant automation into the production of 90 metre long composite wind-turbine blades, or to the erection process.